Percentage Discount

Description

In a sale, one way of displaying prices is as a discount percentage. For
example '20% off'.

You can offer X% off selected sale goods, a given range or 'everything'. The
amount of discount can vary from relatively small to relatively big, but when
this is smaller (typically under 10%), this method of displaying the price will
be less effective. On the other hand, if you can show large discount percentages
(typically 50% and above), the deal will look more attractive.

Another approach is to use varying percentage discounts. You can now display
the discount as 'up to' the maximum discount, for example 'Up to 70% off'. The
amount of discount can be based on different factors, such as selected products,
amount spent, customer loyalty value, etc.

Example

A shop has a '15% off everything' sale, with signs to this
effect everywhere.

A business-to-business firm sends flyers to customers with
'January discounts', then follows up with phone calls to get sales calls. Sales
people know what discount percentages they are allowed to add to further sweeten
the deal.

Discussion

Discounts have the advantage of being easy to understand. They also do not
include actual prices, which keeps customers' minds off the amount they will
have to pay. In this way, you can make a still-expensive item seem like a
bargain.

A reason why percentage discounts below 10% is less effective is because the
length effect comes into play, making the
discount seem suddenly much less as a two-digit number falls to a one-digit
number.

Percentage discounting is also easier in signage and labels. Printing is
cheaper and many of the tags will be the same, creating a
repetition effect.

Discounting can be a problem for you when you reduce items below cost price
and so will make a loss on them. While this is sometimes necessary in order to
shift stock or generate cash, it can also easily be accidental, especially when
you have many products in the sale.

It may not be clear what the percentage is based on. For example it could be
'previous price' or 'recommended retail price'. Many customers will not think
about this. There may, however, be legislation that affects what you can do, for
example that the previous price should have been offered for a defined period
during the past year, so do be careful here.

When your mark-up is does as a percentage of cost, then discounting by a
percentage makes profit calculations easy. You still have to be careful, though.
For example a mark-up of 50% (on the cost price), followed by a discount (on the
selling price) of 10% represents a final mark-up of 35%, not 40%.